Chesapeake's $4bn loan keeps company going - for now

May 17, 2012|Reuters

By Joy Ferguson and Smita Madhur

NEW YORK, May 17 (IFR) - Chesapeake Energy got a favorableresponse after managing to tap the capital markets for a $4billion bridge loan this week, but the embattled company isstill far from out of the woods.

The loan was upsized from an initial $3 billion and drewcommitments of around $12 billion, mainly from high yield bondaccounts and hedge funds attracted to the juicy yield thatChesapeake offered.

The loan pays a rate of 700 basis points over LondonInterbank Offer Rate, or Libor, with a 1.5 percent Libor floor.The selling price was tightened to 97 cents on the dollar from96 cents on the dollar.

"So it's perfect. It's a high coupon, low duration debt. Youcan count the number of those on one hand."

By Thursday, however, the initial glow had dimmed asinvestor attention refocused on the myriad problems facing theoil and gas producer which is under pressure to deliver on astrategy of asset sales and avert a liquidity crisis.

Chesapeake has a 2012 funding shortfall of $9billion to $10 billion as natural gas prices remain at thelowest in a decade. It is also grappling with the fallout from aseries of Reuters reports revealing potential conflicts ofinterest in its CEO's personal financial transactions that haveattracted a swathe of negative headlines. For more, please see[ID: nL1E8GH6P6]

"I think there is going to be a healthy sense of skepticismuntil the asset sales are announced and the valuations areproved up," said Philip Adams, senior bond analyst at researchfirm GimmeCredit.

Investors in the loan certainly looked to be adequatelycompensated. Chesapeake is planning asset sales totaling $9billion to 11.5 billion in 2012 and intends to use a portion ofthe proceeds to repay the bridge loan. If the asset sale doesnot fully repay the loan, pricing steps up to 800 basis pointsover Libor.

Additionally, if the loan is not fully repaid by Jan. 1,2013, pricing steps to 1,000 basis points over Libor with aTreasuries plus 50-basis point make-whole provision. Theprovision benefits investors and creates an incentive to theissuer to pay down the loan beforehand. Beginning on May 11,2013, lenders will have the option to exchange their loans for11.5 percent notes.

BONDS TAKE BEATING

Chesapeake bonds have been pummeled this week after Standard& Poor's downgraded the credit for the second time in threeweeks, this time from to BB- from BB. S&P cited the CEO-relatedissues, which underscore shortcomings in corporate governanceand the likelihood that Chesapeake will face an even wider gapbetween its operating cash flow and planned capital expendituresthan S&P previously anticipated.

The rating agency is concerned of a covenant breach in thenext three quarters as Chesapeake's debt levels climb and itsloan covenants already state its debt cannot exceed 4x itslagging 12-month EBITDA. Total debt as of March 31, 2012 was$13.1 billion, while EBITDA was weak, at $838 million.

On May 9, Moody's changed its rating outlook on the companyto negative from stable. Moody's rates the company Ba2.

"They are fading back to a mid high-yield company, so theclass of investors changes," said Gross. "It's now a true highyield play, and with some hair on it, because of theinvestigations and disclosures, and Chesapeake has had tomigrate into different hands."

Hedge fund and pure high-yield funds have replaced insurancecompanies and pension funds as holders of the debt as the notesget downgraded, forcing higher quality funds to sell out of thename.

"This story would not have as much traction if natural gaswas at $6 per million cubic feet and CHK was "A"rated andgenerating gobs of free cash flow," said GimmeCredit's Adams.

This week's loan looks very similar to the company's lastbond deal, a $1.3 billion senior unsecured issue that priced inmid-February. That bond was also considered an asset salebridge, featuring a special early call period between November15 2012 and March 15 2013. The notes are non-callable otherwise.

The unique window of callability was designed to give thecompany extra flexibility as part of its larger financing plans,allowing it to redeem the bonds during that time if the plannedasset sales go through. The bonds, rated Ba3/BB+ at pricing,were sold at 6.775% at a discount of 98.74 to yield 7%, in linewith talk.

Still, some investors considered the new loan to be a verysmart move by the company given its current problems.

"This line of credit gives them a lot of time," said JamesLee, senior analyst at Calvert. "Granted, the deal comes withhefty pricing in order to entice investors, but it gives them along runway to transact and it gives management time tonegotiate for the best price possible for their asset sales."

One negative is that the bank loan has first priority inbeing repaid with asset sales. However, it increases thecompany's liquidity by repaying the outstanding on its bankrevolver and improving cash levels.

"They aren't just adding $4 billion in new debt. It's a veryshrewd business move. It increases liquidity and buys themtime."

The new facility ranks pari passu, or of equal standing, toChesapeake's outstanding senior notes. Goldman Sachs andJefferies lead the loan, which broke for trading at 98.125-99before trading down Wednesday to 97-97.5.